in the space. We'll probably have some time utilization to fill some of that gap, but we certainly feel good about our opportunity to source future demand. We think that our distributed footprint and all those data points that are out there in the field for us would give us a little bit of a leg up on planning ahead, but it is something if everything, if we had strong local market right now with this type of major project work, it would be challenging today. So it's not even a bad thing that we don't have that. But all I could say is I think that with all the data and all the information and touch points that we have throughout our network, we should be able to get ahead of that curve. All right. Good luck. Thank you. Thanks, Mick.

We'll go next now to Jamie Cook with Truist.

Hey, good morning. Nice quarter. I guess two questions. Ted, clearly now with markets and recovery, trying to think about if you could update us on your thoughts on setup for incremental margins this cycle. Obviously, we have ancillary, which is a headwind. We don't have noise from acquisitions. It sounds like the bear case on rental really shouldn't be there anymore. I don't know if investing on tech goes up or if that's a positive relative to the aspirational targets you laid out in, you know, at your analyst day of the 50 to 60%. And then my second question, with markets and recovery, and it sounds like, you know, suppliers can ramp, but only to a certain degree. To what degree do you think that, you know, the industry would look to, you know, use acquisitions or consolidate, you know what I mean, just in order to, you know, get fleet? Thank you.

Yeah, I'll take the first part, Jamie, and Matt can take the second. On the margins, we've long said our goal is to drive margin expansion. And, you know, I think if you look at our year-to-date results, and certainly the second quarter results included within that, we're doing that on an underlying basis. And that, to us, is the most important way to measure our business internally. So, you know, just to kind of, like, go through a bridge, you'd see the as-reported margins being up 70 basis points year on year. When you back out the gain, they're down 40. I think David made that point. That includes that outsized growth from ancillary and rerun. If we adjust for that, just that outsized growth, the margins were up 40 basis points year on year, even while we included or absorbed, excuse me, 20 to 30 basis points from the higher fuel price. Again, that's the internal consumption piece. So that to us is indicative for the underlying cost performance of the business and gets at kind of that goal we've talked about. And when you look at those big three metrics across cost of rental, here again, labor, delivery, R&M, all showing positive absorption year to date and in the second quarter. So as we roll that forward, you know, again, we think the core should continue to drive margin expansion. Things that are to some degree outside our control, like how we serve customers with ancillary, you know, will be impactful. That said, these are things customers are asking us to do. And frankly, they're part of what's driving the, I would say, that strong growth, right? If you look at ancillary being up, or sorry, specialty being up 25%, the underlying market is not up 25%. We are certainly outpacing the market. And we think to some degree that's driven by the fact that we are being selected as a partner of choice, key part of our strategy for doing these small things. So we're not going to shy away from them. We're going to support customers. We're going to take advantage of that strategic focus and then explain to people what that ultimate impact may be on margins. So we can dig into any of that, but hopefully that gives you at least a sense for how we're thinking about the business going forward.

And as far as the acquisitions and consolidation, I think that will continue in the industry. I've said it for a while. The bigs will continue to get bigger. I think consolidation is part of that. Even those that had very aggressive hold-start models have turned to realize it's just faster, more complete, a better way to fill some of your gaps if the math makes sense. So I think that will continue to be a part of the industry's growth.

And sorry, one quick one. Of the CapEx increase, what was GenRent versus specialty implied in the increasing forecast?

We haven't broken that out, but you could assume you see the growth of each of those. You could assume that there's a lot of specialty growth within that CapEx number.

Okay, thank you.

Thanks.

Thank you. We'll go next now to Angel Castillo with Morgan Stanley.

Hi, good morning. Thanks for taking my question. A little bit of a bigger picture, I guess. Just wanted to go back to the comment that you could potentially get upgraded to investment grade over the next 12 months. Can you just talk about, I guess, how important that is to your capital allocation strategy? Just the reason I ask is your leverage at this point is kind of near its historical lows and continuing to decline with this very strong kind of fundamental performance. So just I'm curious how you perhaps kind of weigh that investment-grade opportunity versus opportunity to get upgraded versus opportunities of M&A or more buybacks.

Honestly, it's a great question. Thanks for asking, Angel. I don't think it really affects our capital allocation strategy at all. I mean, we're clearly comfortable with the idea of moving to IG at this point of our evolution. If you look at our credit metrics, you know, we've screened IG for many years, and it's really been our internal financial policy that kept us in the high-yield realm. And the idea there was to ensure we had the balance sheet capacity to support that inorganic growth, if and as we saw opportunities. But as we've grown, we've organically essentially sourced all that M&A capacity we would need, you know, with frankly just looking at the EBITDA, we have an absolute dollars and what that would allow us to do on a purely debt funded basis. So as we took a step back and really assessed kind of like what our existing capabilities are, where we think reasonably we might deploy capital, and then compare that against cost-benefit of staying high yield, we just feel like we're at the point where we're very comfortable with the idea of migrating into IG and taking advantage of a lower spread for the simple reason doing so does not constrain us in any way, shape, or form from M&A strategy. So, Matt, I don't know if you'd...

I think you just hit it. It has no other side of the coin cost to us. So why not take the opportunity?

Amazing. Super helpful. And then I wanted to ask just on the CapEx front, you mentioned if you wanted another billion worth of fleet that you probably would be a little bit challenged in getting that. So just curious, one, can you talk about maybe where in particular in your fleet or type of products that you might be sourcing there is a little bit more tightness, I think, over the last year or so, you've generally talked about more availability of fleet from the supplier. And then a little bit of a preliminary into 27, just curious, you know, as you see this demand backdrop, the backlog, I believe you've talked in the past about megaprojects giving you more like a 12- to 18-month kind of visibility. So as you see all of that and this tightening in the supply base, how are you thinking about your CapEx needs, you know, at least at a high level for next year versus perhaps some of this increased capex this year being able to kind of set you up for that growth next year? Thank you.

Yeah, so the carryover of the growth this year certainly helps. It will help for the growth next year. And it's way too early for us, Angel, to get into forecasting capex next year other than to say you could expect we'll sell a little bit more use based on the bigger base of rotating our fleet and the correlating replacement capex from there. And then when we get into our planning process, which is ground up, very robust, we'll have a better idea of what the growth needs are over and above the carryover. So nothing to really say there other than we do expect next year to certainly be another year of growth. And what level of growth it is, we've got to do all the work before we get out of our skis there. And then just in the $1 billion of the fleet, where there's maybe tightness? the areas that that you can imagine it's pretty broad because the major projects are using everything um so it's specialty products and you know think about the aerial the reach forks the stuff that usually run at high time utilization continue to run at high time utilization very helpful thank you thank you we go next now to sabahat khan with rbc capital markets great thanks and good morning so just i guess on the the h2 guidance obviously the numbers are moving higher versus your initial expectations.

Was this maybe a little bit of you waiting to see how the demand backdrop evolved or did something really inflect? And I know you talked a little bit about some of the non-data center markets, but it does look like fleet productivity comps are getting easier in the back half. Was it you just waiting for some confidence in the market before sort of kicking that up?

And then maybe if you can just share some thoughts around just kind of the expected cadence for the numbers if you can based on the comp last year. yeah so we had confidence in april you usually wouldn't do a raise in april because we to your point we'd want to say see how the year is shaping out but we had a lot of confidence that was it was going to shape out uh strongly we just exceeded our expectations the pipeline of projects moved faster and got deeper so i would just say combination of more demand strong execution from the team gives us even more confidence for what we'll see in the back half than our original expectations even on our increased guide in April. So, and the ability to pull some more CapEx in. So it's that. And so the second part of your question was cadence. I assume if that's CapEx cadence, you would just think about, you know, we'll bring in against the new guide somewhere around 30 to 35% in Q3. balance in Q4, not dissimilar to how we usually bring in capital.

Great. And then there was a bit of discussion earlier in the call around just how some of the incremental costs around repositioning are being absorbed. If we bring it all together, is that just a function of, look, at this point, given it's been going on for a while, you've been able to adjust your business, reduce costs, and get customers to sort of take some of those increases?

Or is it just the demand backdrop is so strong, you're able to maybe price for it better just trying to think through how we should expect that sort of the transportation kind of cost evolution for the next few quarters or you know is that built in now the rates are in good place and you're comfortable with sort of the margin outlook yeah i i would say it's the former it's a lot of hard work right so it's it's really deep diving on our processes i mean let's face it when something gets away from you so to speak and you got to look at you got to look at it differently so i would say it's just a lot of change in how we address it a lot of coordination and and frankly more eyeball eyeballs and elbow grease on it so the team's done a really good job offsetting it and as i said earlier you'd have to assume i don't have the math you know directly behind it but with with fuel increases alone our cost per mile has to be up so to get that kind of positive absorption is really more process change and execution from the field thanks so much.

We'll go next now to Tammy Zakaria with JP Morgan.

Hi, good morning. I have a follow-up question on your rental revenue. Its growth accelerated to 13% and year-to-date it's up almost 11%. So is there a reason to expect rental revenue growth to slow down from the year-to-date double-digit rate? Or ask another, what is your expectation of rental revenue growth for the next to COVID.

So thanks for the question, Tammy. And you can kind of see the range of growth that's implied across our range. So on the one hand, we always encourage people not to anchor to the midpoint. On the other hand, inevitably these conversations start there, but we would point people towards the range, which points to we think any reasonable set of outcomes. Certainly, if you think about kind of like the back half and probably the parts that could most reasonably drive the greatest part of volatility, it's probably things around ancillary and re-rent where, you know, you saw that accelerate, obviously, in the second quarter. That has proven very difficult to predict, as we talked about earlier in the call. So, you know, we did see a nice acceleration in OER, and that's important. And certainly, we see strong demand backdrop in the back half. So, we're optimistic about that. But in terms of kind of where we fall out in the range, you know, I hate to say we'll an update for you in October, but we will.

Got it. Another question on your local market demand or the industry local market demand. In your view, what's holding it back from maturely strengthening after staying stable for several quarters? Is it housing that needs to come back? Is it interest rates? Is it inflation that needs to come down? So what can perk up this end market?

So admittedly, it's all theoretical, but you could imagine interest rates has been topical and one of the drivers in that coming down. Residential growth, right, would then feed other necessities, whether it be municipal works, retail, supermarkets, schools, all the stuff that goes on as you see residential growth in an end market would all be things that would certainly assist. But then small businesses, right? We're still in an inflationary environment. Small businesses starting to invest back into their business, whether it be local manufacturing, local retail, all that is just kind of bouncing along right now. Those are the things that we think would really spur some growth in the local markets.

Understood. Thank you.

Thank you. We go next now to Chad Dillard with Bernstein.

Hey, good morning, guys. So, Matt, in your prepared remarks, you talked about demand outpacing original expectations. And I was hoping you could talk about the podcast of surprise on two axes. So, first of all, maybe buy by business segment, and then second, buy-in market.

I would really just say it's the project pipelines, right? So, if you wanted to say a little bit, maybe the local market growth of low single digits helped a little. But the big driver here is the major project pipeline. And it's across the board. And as I had said in my opening remarks, there's a lot of noise about data centers, but we're seeing LNG terminals. We're seeing infrastructure, airports. We're seeing stadiums. I mean, pharmaceuticals. So it's really quite broad in the major project work, Chad. But I would say it's major projects, certainly tied to power, certainly tied to, you know, semis are picking up. And this is without seeing, as I said earlier, Petrochem picking up, and even the downstream side where those folks are so busy, you can imagine they're putting off any kind of turnarounds or other things that we'd usually participate in. So generally, major projects across the board are just stronger and deeper.

Great, that's helpful. And then just a second question on your return on invested capital. Can you talk about the path to improving it? And let's just leave aside just the market, but talk about what United can do itself. Maybe you can break down your efforts by general versus specialty.

Yeah, so I guess I'll address it overall just because we don't get into specific segments. But one of the things we've talked about, obviously, on this call, has been driving underlying margin expansion in the business. Now, when you think about the way ROIC is calculated, it's notepad over invested capital. So the NOPAT obviously includes whatever the effect is of ancillary and re-rent. But fundamentally, our goal is obviously to drive margin expansion that when you think about the impact that has on ROIC, it's positive. And then the second thing you've heard us talk a lot about today and over the last many years is driving positively productivity. So when you think about that as a proxy for capital velocity and driving better capital turns, that should contribute. So, you know, that is the goal. You've heard us talk about, you know, being as efficient with fleet as possible. You know, you can see what we've done in fleet productivity this quarter and some of the comments we've had on time mute. we will continue doing those things and expect that that should continue to drive improving returns on the business. And then, obviously, making sure that M&A we do, you know, is value additive. Admittedly, that can have a short-term dilutive impact on ROIC, given acquisition accounting. And that's why we frame the deals really as cash-on-cash returns, so people can and see that discipline across our capital allocation strategies.

Thank you. Thanks, Chet.

Thank you. And ladies and gentlemen, that's all the time we do have for questions this morning. At this time, Mr. Finery, I'll turn things back to you, sir, for any closing comments.

Thank you, Operator, and thanks to everyone on the call. We appreciate your time, and I'm glad you could join us today. Our Q2 Investor Deck has the latest updates, and as always, Elizabeth's available to answer your questions. So until we speak again in October, stay safe. operator, you can now end the call.

Thank you, Mr. Flannery. Thank you, Mr. Grace. Again, ladies and gentlemen, this will conclude today's United Rentals conference call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.